2023-11-11 15:23:00
Good news for Italy? Friday, November 10, Fitch, which assesses the solvency of countries, left its assessment of Italian sovereign debt unchanged, at a rating of BBB. A note which, if it translates “ low risk of failure », according to the rating agency, nevertheless implies that unfavorable commercial or economic conditions are more likely to alter the capacity to pay the financial commitments of the country concerned.
Especially since Italy has a debt reaching more than 140% of GDP, the second largest in the euro zone, following Greece. In comparison, that of France amounts to a little more than 109% of GDP.
«This weight that it has carried for more than 30 years brings budgetary vulnerability to the country », explains Andreas Eisl, senior researcher at the Jacques Delors Institute. Especially since Italy, since the 2000s, “has managed to regain a balanced budget, and even generate a surplus “, that is to say to obtain revenues greater than its expenses, adds the researcher for whom she would be more of a good student without this burden.
However, in a context where interest rates have increased, with the multiple increases decided by the ECB to contain inflation, Italy finds itself weakened. Inflation, which has hit the country hard due to its energy dependence on gas, is weighing on its debt and its public finances. “ Faced with a rise in rates, there can be a snowball effect », Notes Raul Sampognaro, economist at the French Observatory of Economic Conditions (OFCE), with the risk that the country will go into ever more debt to catch up with its deficit, forcing it to borrow at increasingly higher rates.
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Markets on edge
The markets are also very sensitive to the slightest shocks affecting Italy. As proof, when the Italian Prime Minister changed her public deficit forecast for 2024, going from 3.7% to 4.3%, Italian borrowing rates suddenly increased. The spread, this difference between German ten-year interest rates, which serve as a reference, and those of Italy, even exceeded 200 basis points in October, the highest since January. A result which, however, remains well below the 600 points reached during the euro zone crisis in 2011.
This is therefore significant pressure for the Meloni government, given that it is becoming ever more costly for the country to refinance itself on the markets. For his part, Giancarlo Giorgetti, the Minister of the Economy, was alarmed in mid-September:
“What scares me is not the opinions of the European Commission, but those of the markets which buy public debt. Every morning I wake up and I have a problem: I have to sell public debt and I have to convince people to have confidence.”
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Sluggish growth
« Or, l’one of the levers to get rid of a large debt is to have growth », adds Andreas Eisl of the Jacques Delors Institute. But here once more, it is not won. Because the Italian economy has been characterized by stagnation in its productivity and GDP since the 1990s. “This is Italy’s black spot, which puts it on the front line and weakens it in the face of crises », notes Raul Sampognaro of the OFCE.
However, emerging from the health crisis, the Italian economy showed a certain resilience compared to its European neighbors. If over the last thirty years its productivity and its GDP have remained at a standstill, it has returned to growth. In 2021, following being strongly affected by Covid-19, the country experienced a rebound of 6.7%, then 3.7% in 2022. “ Italy seems to have left the Covid crisis behind it thanks to productivity gains that may surprise », Analyzes the economist.
But for 2023, the forecasts were lowered in October, going from 1.3% to 0.7%. Italy nevertheless narrowly avoided a recession in the third quarter with growth at zero. Marked by a highly industrialized economy, made up mainly of SMEs and small businesses, the country is suffering from the agitations of its trading partners, notably Germany, and remains dependent on its domestic demand penalized by a declining purchasing power.
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A government trying to curb its spending
In this tight economic context, the Meloni government finds itself under fire from criticism and must maneuver to satisfy its electorate, Europe and the markets. However, the latter reacted negatively to the new budget unveiled in mid-October, criticizing Giorgia Meloni for a certain budgetary relaxation and a lot of promises in comparison with the one presented a year earlier, in the footsteps of her predecessor Mario Draghi. The new budget provides, in fact, 24 billion euros for support measures for households and businesses such as tax cuts, exemptions from social security contributions and even reductions in charges.
Expenditures imposed by the inflationary context since the outbreak of the war in Ukraine in February 2022. “ With the current imperatives, it was necessary to pursue support measures in the face of inflation, and to take them over time, which weighed on the budget », adds Sofia Tozy. The government also inherits measures put in place in the past such as the “ Super bonus », a very expensive aid which relates to energy renovation. The executive nevertheless undertook to reduce its scale.
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Unlike the markets, the budget presented by the President of the Council of Ministers seems to follow the rules laid down by Brussels. On the European scene, “the Meloni government has also not sought confrontation with European actors within the framework of the stability program, they therefore seem to follow the European criteria to reduce their deficit and stabilize, or even reduce, their debt », confirms Andreas Eis of the Jacques Delors Institute. The Italian deficit should also fall below 3% of GDP in 2026 in accordance with the rules of the European Stability Pact.
As for the debt, it should decrease slightly and fall below 140% in 2026. “ In our forecast, we expect a gradual phasing out of support measures, which will improve deficit indicators and contain the debt », confirms Raul Sampognaro of the OFCE. Moody’s, the rating agency, must also make its assessment of Italian sovereign debt on November 17. A rating currently at Baa3, just above the category where debt securities are exposed to significant credit risk.
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